The volatility beta pinpoints opportunities for MEMS

Micromachines have killer apps, like ink jets and accelerometers, and sleepers, like biomedical sensors. Like the Nasdaq volatility index, there are quantitative clues for investors, says this MEMS authority.

Many people have asked me what kind of MEMS business should they create or invest in. The answer might be visualized in a concept we'll call the volatility beta. Similar to a volatility index for a stock, which sees the price sensitivity of a stock in the context of its industry sector, the volatility beta looks at the level of risk associated with specific MEMS market sectors based on a number of criteria. These include the diversity of the sector based the number of customers and applications, the total size of the market these create, and the compounded annual growth rate (CAGR).

Other factors include the number of competitors playing in the sector, the projected margins, and the barriers to entry (including the availability of capital). From a numerical value, the higher the beta, the higher the volatility of the MEMs market segment. A beta of 5 is average. Now lets look at some segments:

Industrial: With a beta of 2, this has the most diverse number of MEMS applications, from process control pressure transmitters, pneumatic/hydraulic control systems, heating ventilation and air conditioning systems, to name a few. Also, many kinds of MEMS can be used in these applications, e.g. pressure sensors, force sensors, and temperature sensors.

Environmental Monitoring and Medical/Biochemical: With a beta of 3, they enjoy a wide variety of current (and many potential future) applications with relatively few companies competing. The interesting thing is that these current players have intelligently "niched out" their product offering. Drug discovery, food/water screening, gene sequence, DNA analysis, and patient monitoring are some of the current application of MEMS with a boundless number of new applications coming to the fore in the next few years.

Automotive: Currently enjoys a beta of 3 due to the exploding number of new MEMS applications in production, tied in with existing applications. Of the only 6 true killer MEMS applications, two " 1) manifold absolute air pressure (over 30 million) and 2) airbag accelerometers (over 90 million) " were fitted into the approximately 55 million vehicles produced worldwide in 2002. At last count, there were over 70 opportunities for MEMS in automotive applications 1. The other good news is that these can be pressure sensors, fluid quality sensors, accelerometers, gyros, force sensors, proximity sensors, temperature sensors, humidity sensors, and gas composition sensors, plus many others. The major problem here is the extreme cost issues and associated low profitability of this business.

IT Peripherals: Boasts two killer applications . . . read/write magnetic heads (over 1 billion in 2002) and inkjet printer nozzles (over 650 million in 2002). These two applications constitute a significant portion of the total sector sales and each of these sectors is dominated by a limited number of "800-pound gorilla companies." Hewlett Packard inkjets and Seagate read/write heads are excellent examples of gorillas that can dominate an application sector.

Telecommunications: Had received the greatest attention from investor, trade, and popular press over the past few years, but has fallen on bad times as have its telecom industry customers, e.g. JDS Uniphase, Corning. Optical MEMS funding has slowed dramatically with first round funding virtually non-existent. It is my opinion that new investing into these companies will be made more judiciously and only after significant due diligence. The current beta of 8 was changed from its previous value of 6 largely due to the contraction of the telecom industry, the failure of many MEMS optical telecom startups, as well as the industry forecast for this sector. The current jewel in the crown of telecom MEMS is Radio Frequency (RF). Although the applications are currently somewhat limited (cellular handsets, blue tooth, RF in the home), these offer immense volume opportunities (there were over 420 million handsets sold worldwide in the year 2002). RF MEMS has the potential to be in every wireless device because of its incredible performance enhancements over existing solutions. This, coupled with extremely low cost manufacturing and the potential for monolithic integration, make RF MEMS a truly enabling technology.

A final comment on "Where Is The Action In MEMS?" is, in a word, infrastructure, i.e. manufacturing, packaging, testing, and assembly. Although we have not included this in our volatility index since it is not a classical application sector, I would have to give infrastructure a "2". Why? Because infrastructure is all pervasive.. it applies to all application sectors and all MEMS devices, which significantly mitigates risk.